Extended warranties not worth the paper they are written on

Salesmen working for at least one major electrical retailer report they are yet again ‘under the gun’ to sell extended warranties and their commission schemes have been restructured to ensure this – no extended warranty sale means little or no sales commission.

In a basic validity test I visited three different retailers in Sydney and in my opinion the pressure to take up these warranties was both substantial and unpleasant, even to the extent that the sales people would further discount the sale price of the goods in full or partial compensation if I took the extended warranty.

In fact one told me that his entire commission on the sale would now only be paid if an extended warranty was sold with it so could I help him out please.

So what is right and what is wrong with extended warranty?

Normal, expressed or statutory warranty is a basic consumer right. Even if the warranty is time limited to 12 months there are further remedies if an expensive item breaks down outside that period - if you buy a TV, even a low cost one, you reasonably expect it to last more than 12 months.

An extended warranty is an extension of time of the statutory warranty but it can have lots of exclusions.

Retailers know that most (let’s just say 99%) of the goods they sell will last the distance so you are playing a Russian roulette gambling that the few hundred dollars will be a good investment.

The retailer is gambling that it won’t be needed and is using this pot of gold to pay commissions and increase its profit. In other words the extended warranty is seldom underwritten by an insurance company or by provisions in the balance sheet.

The problem is that this creates a huge liability on the balance sheet should the retailer go belly up (and as many are franchises it does not mean that the whole company needs to go belly up – just the individual store). Often franchises are sold time and time again and the new franchisee has no obligation to cover the extended warranty.

The various state departments of Fair Trading are unanimous with the advice “You don’t need to purchase an extended warranty if it only covers a length of time that it would be reasonable to expect the goods to last for anyway”. Warranty it is your legal right.

But there are too many loopholes

Many of those who have taken advantage of extended warranties have complained bitterly that there are too many loopholes.

Many so called extended warranties can limit your statutory rights by stating that you must agree to the umpire's decision. Retailers can get away with this because it is not really a warranty at all but an offer to provide a level of service or protection on the provider’s terms. Yes you can sign your rights away.

And all require an original receipt (not the faded unreadable thermal receipt) and more than a few claims have been knocked back because purchasers could not find it. You see many stores don’t register the warranty and just rely on the sales brochure and receipt to prove you have it.

Whether a warranty works or not all comes down to the largess of the retailer at that time. Some have gladly replaced the item (subject to transport costs being met) but most try to upsell you into a new item at a pro rata price.

Loopholes include:

Not covering the cost of a ‘home call out’ to check the item (most relevant with large TVs) or an inspection fee to check something over in a workshop (usually around $100) to see if it is covered under warranty.

Not covering the cost of transport of the broken item from the home back to the retailer and the replacement item’s delivery to the home. These costs can a few hundred dollars.

Not covering the cost of professional de-installation and re-installation either – a few hundred dollars more especially when the warranty may be void if you use your own resources to do this.

Covering parts but not labour. This is justified to protect the retailer against costly identification of intermittent faults that often don’t occur in initial testing.

Many promise to repair or replace with a like product and that like does not mean the same brand, model or even standard. An expensive top end 55” Sony or Samsung TV could be replaced by a low end clone or even a second hand item – especially once the model is out of production.

Some items are declared “consumables”. One extended warranty did not cover the replacement of bulbs (guess what – back lights in LCD TVs were excluded).

Power related issues are not generally covered unless you purchase and use an approved power surge protector (at an exorbitant price) from the retailer.

What exactly is fair wear and tear?

In the IT world a notebook owner was denied an extended warranty claim because there had been evidence of mishandling. The owner readily admits that the screen and surrounds got scratched occasionally when being taken out of the truck but the breakdown was due to electrical derangement – no dice said the retailer.

Claims for a broken USB port on a mobile phone or GPS or notebook are typically dismissed as rough handling despite the fact that these are well known design faults in many items.

Loss of data or replacement of Operating systems or software installation. One notebook owner received a bill for over $500 for inspection, testing, reinstalling Windows and Office and updating firmware in an effort to remove malware that had disabled the boot – consumers are not equipped to know if it’s a hardware or software fault.

On a similar note a dead battery prevented a notebook booting and the owner was charged $245 for a new battery (an excessive amount but normal RRP for the battery) plus a further $330 labour for testing and replacement.

One ‘claimee’ had a $3,000 original cost 42” TV screen and was offered a $250 trade in on a new 55”. The amount was based on the purchase price pro-rated over the time she had owned it. But even a new 42” clone replacement was only around $400 so that was not a good deal.

Another complained that the replacement only carried the balance of the warranty – three weeks in this case.

Another bought a ‘factory second’ and was sold extended warranty only to find later in the small print that the warranty did not cover refurbished goods. Yes he got a refund for the extended warranty but no goods…

Another was told that the warranty provider had gone bust and that he would get a refund of the pro rata of the remaining warranty left but no cover on the goods.

Manufacturers are under pressure too

Retail buying groups are putting incredible pressure on manufacturers to (a) limit standard warranty to 12 months regardless of the product’s life and (b) to set low published mean time between failure rates so that exposure to statutory warranty claims is limited.

One printer manufacturer has been forced to remove the claim of duty cycle - 20,000 pages per month to a suggested use typical per month of 2,000 pages to limit future claims.

A clone TV maker has set a 12 month warranty and stated that “the units are not designed to perform outside design specs" – thus limiting the warranty claim period.

Opinion

Caveat emptor is the term best used – let the buyer beware. With decreasing retail margins the profit solution is extended warranties that generally cost from 10 to 20% of the RRP – clear cop for the retailer.

We won’t even get started on the 'interest free scams'.

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Ray Shaw ray@im.com.au has a passion for IT ever since building his first computer in 1980. He is a qualified journalist, hosted a consumer IT based radio program on ABC radio for 10 years, has developed world leading software for the events industry and is smart enough to no longer own a retail computer store!